Reservation of Rights
A reservation of rights is a written notice from an insurer telling the policyholder that it is investigating or defending a claim but may later deny coverage, or cover only part of it, based on policy terms or facts still being determined.
Last updated October 13, 2026
How a reservation of rights works
At the start of a claim, an insurer often knows only allegations and a few confirmed facts. IRMI explains that a reservation of rights lets the insurer investigate or defend while preserving its ability to decide coverage later, so that acting on the claim is not treated as giving up coverage defenses. It can also help the policyholder by flagging that parts of the claim may not be covered.
A well-drafted letter, according to Claims Journal, typically identifies the policy and claim, states that rights are being reserved, summarizes the allegations, quotes the policy language at issue, lists the specific coverage issues, reminds the insured they may consult their own counsel, and asks for continued cooperation. Some letters also reserve a right to seek reimbursement of defense costs, where the law or policy allows it.
Example
A company is sued by a customer and tenders the suit to its insurer. The insurer agrees to provide a defense but sends a letter reserving rights because part of the complaint appears to fall under an exclusion. The letter quotes the exclusion and explains that the insurer will decide later whether it applies.
Why insurers send them
Liability insurers are expected to act on a claim promptly, and the duty to defend is often broad. A reservation lets the insurer respond without conceding that every allegation is covered. As noted above, delay can weaken the coverage defenses the insurer is trying to keep, which is why these letters are usually sent early.
What to watch for
- Read it closely. Note which coverage issues are reserved and whether the insurer reserves any right to recoup defense costs.
- Timing matters. Courts in many jurisdictions may find an insurer waived or is estopped from asserting coverage defenses if it delays too long after learning the facts. Standards differ by state.
- Independent counsel. In some states, a conflict of interest created by a reservation can entitle the insured to independent counsel paid by the insurer. California is a well-known example, but rules vary widely and the mere fact that coverage is disputed does not always trigger it.
- Not a denial. Coverage is still open. The insurer may later confirm coverage, deny it, or resolve the claim.
Many policyholders share the letter with their broker and consider consulting coverage counsel. Related concepts include the insurer's duty to defend and the exclusions it may cite.
Reservation of rights vs. related terms
- Denial. A denial says the insurer will not cover the claim. A reservation of rights says the insurer will proceed, for now, while keeping its coverage defenses. The claim stays open.
- Non-waiver agreement. A non-waiver agreement is a document that both the insurer and the insured sign to preserve the insurer's rights while it investigates. A reservation of rights letter is sent by the insurer on its own. Insurers may use either, depending on the situation.
- Duty to defend and duty to indemnify. The duty to defend is the obligation to provide a defense, and it is usually broader. The duty to indemnify is the obligation to pay a covered settlement or judgment. An insurer can defend while reserving its position on whether it will ultimately indemnify.
- Declaratory judgment action. In some disputes an insurer asks a court to decide coverage. That is a separate legal step and is not part of the letter itself.
Second example: a management liability claim
A hypothetical venture-backed company and its directors are sued by a former investor, who alleges misstatements about the company's finances. The insurer agrees to pay the directors' defense costs under a reservation of rights. The letter points to the policy's conduct exclusion, which in many forms applies only after a final adjudication, and says the insurer reserves the right to allocate costs between covered and uncovered claims. It also asks for documents and cooperation. The directors keep their defense going while the insurer reviews the facts. Later the insurer may confirm coverage, narrow it or dispute part of it, depending on the policy wording and what the facts show.
What to do and ask after you receive one
- Read the whole letter, and note which policy provisions and facts it cites and which allegations appear to be potentially covered.
- Send it to your broker the same day and consider contacting coverage counsel. This is not legal advice, but the stakes can be high.
- Ask whether the insurer reserves a right to recoup defense costs, and whether the policy or applicable law allows it.
- Ask who chooses defense counsel, what rates or panel rules apply, and whether independent counsel may be available in your state.
- Check whether your policy requires consent to settle. Settling without it can create coverage problems, and a hammer clause may affect what the insurer pays if you refuse a settlement it proposes.
- Track your spending against the retention, and keep notice and cooperation obligations current.
- If the letter misstates facts, respond in writing with corrections, ideally with help from your broker or counsel.
The letter usually follows the first report of a claim. See first notice of loss for how a claim starts. On claims-made policies, reporting on time also affects whether the policy responds at all.
Why it matters for technology, AI, fintech and digital-asset companies
Technology claims are often mixed. A single complaint can allege a service failure, a privacy violation and a misrepresentation to investors, and each may be handled under a different part of a policy or fall under an exclusion. That mix is a common reason for an insurer to defend and reserve rights at the same time. New product types, such as AI features and digital-asset services, can add questions about professional services, regulatory or intellectual property exclusions. Read the exclusions in your errors and omissions, cyber and technology E&O and directors and officers policies before a claim, so a reservation letter does not come as a surprise.
Related terms
Frequently asked questions
What is a reservation of rights?
A reservation of rights is a written notice from an insurer telling the policyholder that it is investigating or defending a claim but may later deny coverage, or cover only part of it, based on policy terms or facts still being determined. It is not a denial of coverage.
Does a reservation of rights letter mean my claim is denied?
No. It means the insurer is proceeding with the claim, often by providing a defense, while keeping open the possibility of limiting or denying coverage later. The letter should explain which issues are reserved. Final coverage depends on the facts, the policy wording and applicable law.
What should I do when I receive a reservation of rights letter?
Read it carefully, note the issues and deadlines, keep cooperating with the insurer, and notify your broker. Many policyholders also consult coverage counsel, especially if the letter suggests a conflict or seeks reimbursement of defense costs. Do not ignore it.
Can I choose my own lawyer after a reservation of rights?
It depends on the state and the conflict involved. Some states, such as California, may require the insurer to pay for independent counsel when the reservation creates a conflict. Others do not. Even where it is not required, you can usually hire your own counsel at your own expense.
Why would an insurer reserve rights instead of denying a claim?
Early in a claim the facts are often unclear, and a complaint may include both covered and uncovered allegations. A reservation lets the insurer investigate or defend while keeping its coverage defenses, instead of having to decide at once. It is not a final decision.
Can an insurer stop defending after it reserves its rights?
In some cases, if it concludes there is no coverage, subject to the policy terms and applicable law. Insurers sometimes seek a court ruling first. If you receive a withdrawal or a denial after a reservation, involve your broker and consider coverage counsel promptly.
Should I settle a claim while the insurer has reserved its rights?
Be careful. Many policies require the insurer's consent before you settle, and settling alone can put coverage at risk. Talk to your broker and, if needed, coverage counsel before agreeing to terms, and keep the insurer informed.
Do I need to respond to a reservation of rights letter?
A response is not always required, but it is often wise to reply in writing. You can correct factual errors, ask questions about the cited provisions, confirm cooperation and record your position. Coordinate the reply with your broker or counsel.
Need this coverage, or just a clear answer?
Our brokers translate terms like Reservation of Rights into a program built for how your company actually operates, and read every policy for the exclusions that matter.
Book a consultation → (opens in a new tab)